Termination for convenience is never convenient

It can be a true horror story when you learn that your construction contract been terminated for convenience. All the planning, hard work, anticipation of a “job well done,” and profit are lost due to circumstances completely out of your control. Although impossible to predict or foresee, the risk of premature termination cannot be overlooked.

Termination for convenience clauses (“TFC”) were commonplace in federal acquisition contracts during wartime and can be traced back to the Civil War. TFCs were originally justified based on the unpredictable length of demand for supplies. TFCs are now found in a wide variety of civilian and military federal contracts and are almost universally found in private and state public works contracts.

The first rational response of the terminated is to argue that the work performed is free of defect. Unfortunately, a TFC allows termination even if the contractor has performed well. In other words, the terminator has the right despite the lack of a wrong. But, there are consequences. The terminator does have to pay the cost of the work incurred along with the overhead and profit on those costs. However, TFCs customarily limit the ability to recover profits the terminated party anticipated earning through completion. One notable exception is Article 14 of the AIA A201-2007 which allows the terminated party to also recover “profit on work not executed.” This phrase is often deleted from the A201 frequently leaving the TFC toothless when triggered.

Because of its origin, the main source of guidance regarding TFCs is federal court. Federal law has generally recognized the principle that “good faith and fair dealing” is implied in every contract. Therefore, a TFC is justified so long as the terminator is acting in good faith, i.e., there is a valid reason for terminating the contract and no fraud has been committed. In Edo Corp. v. Beech Aircraft Corp., the Tenth Circuit Court of Appeals applied Kansas law largely using federal cases in finding that Beech exercised good faith in terminating a design contract with Edo and bringing the design work in house.

Missouri courts are likely to follow the “good faith” standard. In Danella Southwest, Inc. v. Southwestern Bell Tel. Co., the federal district court for the Eastern District of Missouri found that S.W. Bell could lawfully terminate an excavator’s contract after three years despite the significant start-up costs expended by the excavator which had calculated its investment would not be recovered until six years of work. The excavator could not recover its front end costs nor could it recover lost profits.

To lessen the shock and consequences of a TFC, make sure you know whether your contract contains such a provision and attempt to delete or modify the TFC before you sign it. If deletion or modification is not an option, you can always step away from the project or have a contingency plan in place in the event of a TFC.

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